Erbis Engineering Company Ltd v. The Deputy Commissioner Of Income Taxcompany Circle Ii(1)

Erbis Engineering Company Ltd.No.39, II Main RoadR.A.PuramChennai – 600 028... Appellant/ Respondent Vs. The Deputy Commissioner of Income TaxCompany Circle II(1)No.121, Mahatma Gandhi RoadChennai – 600 034. .. Respondent/ Appellant PRAYER: Appeal under Section 260A of the Income Tax Act against theorder of the Income Tax Appellate Tribunal, 'A' Bench, Chennai,dated 30.11.2007 made in I.T.A.No.983/ Mds/2006 for the assessmentyear 2002-2003 against the order dated 16.1.2006 made inITA.No.250/2005-06/A III passed by the Commissioner of Income tax(Appeals) III Chennai-34 against the order dated 14.3.2005 made inPAN/GIR-AAACE6859-D passed by the Assistant Commissioner of IncomeTax, Company Circle II (1) Chennai for the assessment year 2002-2003. The assessee has filed this appeal under Section 260A of theIncome Tax Act, 1961 challenging the order of the Income TaxAppellate Tribunal, 'A' Bench, Chennai, dated 30.11.2007 made inI.T.A.No.983/ Mds/2006 for the assessment year 2002-2003, and thesame was admitted on the following questions of law:(i)Whether the Tribunal is right in applying theratio as laid down by the judgment of this Courtreported in Commissioner of Income Tax v. Rotork https://hcservices.ecourts.gov.in/hcservices/ Controls India Ltd. and others, (2007) 293 ITR311?(ii)Whether the judgment of this Court reported inCommissioner of Income Tax v. Rotork ControlsIndia Ltd. and others, (2007) 293 ITR 311 is indirect conflict to the judgment of the SupremeCourt in the case of Bharat Earth Movers v.Commissioner of Income Tax, (2000) 245 ITR 428?(iii)Whether the warranty amount which is inclusiveof the sale amount is an accrued liability or acontingent liability? 2.1. The facts in a nutshell are as under: The appellant/assessee is engaged in the business of distributing sophisticateddiagnostic imaging equipments to various government and privatehospitals. The appellant provides warranty of its product, whichincludes preventive maintenance service, breakdown calls andprovision for spares, as per the warranty clause. The said warrantyclause is based on contractual obligation and is provided in therespective sales contract. 2.2. The assessee debited a sum of Rs.1,53,01,497/- being theamount of unexpired warranties and claimed deduction. However, theAssessing Officer disallowed the claim of the unexpired warrantieson the ground that the liability is unascertained and, therefore,the same cannot be considered as proper deduction. He further heldthat under the mercantile system of accounting, which the appellantfollows, a deduction in respect of a contract liability forwarranty can be allowed only if the liability has accrued in therelevant accounting period. 2.3. Assailing the said order, the assessee appealed to theCommissioner of Income Tax (Appeals). The Commissioner of Income Tax(Appeals) allowed the appeal filed by the assessee and held that theliability towards warranty is an ascertained liability and the sameis in accordance with the principles of the income tax law. 2.4. Aggrieved by the said order, the Revenue pursued thematter before the Tribunal. The Tribunal following the decision ofthis Court in Commissioner of Income Tax v. Rotork Controls IndiaLtd. and others, (2007) 293 ITR 311 came to hold that since thewarranty provision made as against the liability had notcrystallized against the assessee, the plea of the assessee seekingdeduction is unsustainable. Accordingly, the Tribunal set aside theorder passed by the Commissioner of Income Tax (Appeals) and allowedthe appeal. 2.5. Challenging the said order, the assessee has filed thisappeal on the questions of law referred supra. 3. At the time of hearing of the appeal, the learned counsel oneither side submitted a decision of the Supreme Court in the case of https://hcservices.ecourts.gov.in/hcservices/ 2.5. Challenging the said order, the assessee has filed thisappeal on the questions of law referred supra. 3. At the time of hearing of the appeal, the learned counsel oneither side submitted a decision of the Supreme Court in the case of https://hcservices.ecourts.gov.in/hcservices/ Rotork Controls India (P) Ltd. v. Commissioner of Income Tax,Chennai, (2009) 314 ITR 62 (SC) and stated that the decision of thisCourt in Commissioner of Income Tax v. Rotork Controls India Ltd.[2007] 293 ITR 311 (Mad), on which heavy reliance was placed by theTribunal, was reversed by the Supreme Court in the aforesaiddecision. The principles enunciated in the said decision reads asunder:“The principle which emerges from these decisions isthat if the historical trend indicates that a largenumber of sophisticated goods were being manufacturedin the past and in the past if the facts establishedshow that defects existed in some of the itemsmanufactured and sold then the provision made forwarranty in respect of the army of such sophisticatedgoods would be entitled to deduction from the grossreceipts under section 37 of the 1961 Act.”In the said decision, the Supreme Court also laid down certainconditions, which read as under:“11. What is a provision? This is the question whichneeds to be answered. A provision is a liability whichcan be measured only by using a substantial degree ofestimation. A provision is recognized when: (a) anenterprise has a present obligation as a result of apast event; (b) it is probable that an outflow ofresources will be required to settle the obligation;and (c) a reliable estimate can be made of the amountof the obligation. If these conditions are not met, noprovision can be recognized.12. Liability is defined as a present obligationarising from past events, the settlement of which isexpected to result in an outflow from the enterprise ofresources embodying economic benefits.” 4. In the light of the decision of the Supreme Court in RotorkControls India (P) Ltd., referred supra, the order of the Tribunalstands set aside and the matter is remanded to the Assessing Officerto pass appropriate orders in the light of the decision of theSupreme Court cited supra. 5. In the result, this appeal is allowed by way of remand tothe Assessing Officer. In view of the remand order passed by thisCourt, the questions of law formulated need not answered in thisappeal. No costs. https://hcservices.ecourts.gov.in/hcservices/ To: 1. The Assistant Registrar, Income Tax Appellate Tribunal Income Tax Appellate Tribunal Chennai Bench "A", Chennai. 2. The Commissioner of Income Tax (Appeals) - III Chennai. Chennai. 3. The Deputy Assistant Commissioner of Income Tax Company Circle II(1), Chennai. Company Circle II(1), Chennai. 1 cc to Mr.T.R. Senthilkumar, Advocate, Sr. 34266 T.C.(A).No.379 of 2008 SAI (CO)kk 22/7